Consumers’ Value of Fuel Economy Could Shape Energy Policy

One of the great questions facing policy makers is whether and how to mitigate greenhouse gas emissions. Automobiles are a critical part of this policy problem. In the U.S., personal transportation accounts for 28% of greenhouse gas emissions. Gasoline consumption maps neatly into greenhouse gas emissions.

A debate about the appropriate design of energy policy hinges critically on whether consumers might undervalue energy efficiency. If energy efficiency is valued, a gasoline tax may be the best way to deter emissions. If fuel efficiency is undervalued, alternative policies such as emission standards may be better able to curb emissions.

In a recent study published by the National Bureau of Economic Research, researchers concluded that consumers do in fact value fuel efficiency by comparing 15 years’ worth of used car auction data to measure price differences across high and low mileage vehicles of different fuel economies and how prices changed in response to shocks in the price of gasoline.

The study suggests that used automobile prices move one for one with changes in present discounted future fuel costs, which implies that consumers fully value fuel economy. This conclusion provides parameters necessary to inform policymakers that a Pigouvian tax on emissions is feasible (in the form of a gasoline tax).

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